Global Market Quick Take: Asia – August 31, 2023

What’s happening in markets?

US equities (US500.I and USNAS100.I): S&P 500 and Nasdaq 100 extend gains

Following a brief dip in the morning, the S&P 500 rebounded to conclude the session 0.4% higher at 4,515, marking its fourth consecutive day of gains. The Nasdaq 100 also saw a 0.6% increase, driven by the strong performance of the information technology sector. Apple (AAPL:xnas) rose 2% after revealing its intention to launch a new iPhone in September.

Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): Yields fall modestly on soft GDP and ADP data

Treasuries stay in demand as yields drop by approximately 1bp across the curve. This movement is backed by a downward revision in Q2 GDP and an ADP employment report that came in smaller than anticipated. The 2-year note concluded at 4.89%, while the 10-year note settled at 4.11%.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): markets hold steady; Lenovo leads, Nio falters

The Hang Seng Index commenced the day on an upward trajectory but relinquished its gains as the day progressed, eventually concluding almost unchanged at 18,483. This lackluster performance was influenced by declines in the healthcare and consumer staple sectors. Among the constituents of the Hang Seng Index, Lenovo (00992:xhkg) took the lead by ascending 3.8%. In contrast, the Hang Seng Tech Index faced a 0.9% decline due to the weakness observed in EV and internet stocks. Notably, Nio (09866:xhkg) experienced a sharp decline of 7.4% subsequent to reporting a Q2 loss that exceeded expectations. Meanwhile, the CSI300 Index also wrapped up the Wednesday session with minimal fluctuations. While semiconductors, electronics, and media stocks exhibited strength, this was counterbalanced by weaknesses in the banking and non-bank financial sectors. Suppliers of Huawei gained subsequent to the unveiling of Huawei's Mate 60 Pro mobile device.

FX: EUR strengthened on strong CPIs, AUD weaker

More dovish data in the US put the dollar on the backfoot, while firmer inflation prints in Germany and Spain brought EURUSD above 1.09 although it failed an attempt of 1.0945. EZ inflation data in focus today. GBPUSD broke above 1.27 amid a data-light week with focus on US and EZ. AUDUSD broke above 0.65 despite soft monthly inflation data and dismal building approvals, but could not sustain the move. USDJPY remains close to 146.

Crude oil: Inventory drawdowns underpin, more production cuts from Saudi Arabia on watch

Crude oil prices rose after another sharp drawdown in inventories. EIA’s data showed that US commercial inventories fell 10.6mn barrels last week to the lowest since December, driven by massive declines in the Gulf Coast region. Meanwhile, reports suggested that Russia is in talks with OPEC+ on extending the supply cuts. Expectations that Saudi Arabia will extend its voluntary production cuts by another month are particularly running high.

What to consider?

US GDP and ADP provide dovish surprises

The 2nd estimate for Q2 2023 GDP was revised lower to 2.1%, softer than the expected and prior 2.4%. The revision was based on softer inventory and nonresidential fixed investment, partly offset by higher consumer spending and government spending. PCE prices and the deflator for the quarter were also softer. More of the dovish surprise came from ADP jobs private payroll data which added to hopes that Fed will not hike more after JOLTS data yesterday. ADP payrolls were cooler-than-expected at 177k (exp. 195k), down from the prior month's even hotter 371k print after a revision from 324k. Despite last month's strong ADP data, NFP was below expectations. Therefore it remains hard to say which direction NFP could go this Friday. November Fed rate hike is still priced in with 50% probability.

US jobless claims and July PCE on watch today

Headline and core PCE is expected to stay firm at 0.2% MoM in July while the YoY may be slightly higher at 3.3% (prev. 3.0%) and 4.2% (prev. 4.1%) primarily due to base effects. If actual numbers are higher than expectations, concerns about a sticky core inflation may return, spelling a risk-off and bringing the dollar back higher, but focus will turn to Friday’s NFP. A softer print, meanwhile, will support the case for no more rate hikes from the Fed, supporting risk assets.

Firm German and Spanish inflation put the focus on EZ inflation due today

Spain’s August inflation rose more than expected, while Germany’s was softer than last month but above expectations. Focus shifts to Eurozone inflation due today, with a bias seen for a firm print again. Base effects could bring energy inflation to drop in Eurozone in August despite the recently higher global oil prices, but will lift the core reading. Meanwhile, holiday demand as well as the effects of government subsidies could bump up the services inflation further in the month, keeping overall core CPI sticky. Bloomberg consensus expects headline CPI for the Eurozone to slow to 5.1% YoY from 5.3% YoY in July and core to ease to 5.3% YoY from 5.5% previously, so the expectations are also looking modest and an upside surprise could be a fair possibility. ECB members have also been hawkish lately, and higher-than-expected print can be the trigger for one last rate hike from the ECB next month.

China's manufacturing and non-manufacturing PMIs expected to decline further, exports remain a concern

The median forecast from Bloomberg's survey indicates a further deceleration in China's NBS manufacturing PMI to 49.1 in August from 49.3 moving deeper into contractionary territory. Despite the recent stabilization of the Emerging Industries PMI and steady steel production, the persistently weak trend in exports is projected to continue exerting a drag on manufacturing activities. Furthermore, NBS non-manufacturing PMI is forecasted to slow down to 51.1 in August from July's 51.5, attributed to weaknesses in the property sector and disruptions to infrastructure construction due to flooding and stress on local government funding.

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